Contractionary budget may be needed, says former Central Bank deputy

Former Central Bank deputy governor Stefan Gerlach: Political debate in Ireland “is one where the emphasis on long-run fiscal stability is not very high”. Photograph: Eric Luke/The Irish Times

Former Central Bank deputy governor Stefan Gerlach, hired to help stabilise the financial system during the crisis, has warned that Ireland may need to reverse plans to cut taxes and raise spending for a third straight year.

“Economic growth is not like a soccer game – a higher score isn’t necessarily better,” Mr Gerlach told The Irish Times. “While it’s clear that since the crises the focus has been in improving public finances, I am worried that Ireland does not focus sufficiently on the long run.”

Political debate in Ireland “is one where the emphasis on long-run fiscal stability is not very high”, said Mr Gerlach, a dual Swedish-Swiss citizen, who served as a deputy governor of the Central Bank between 2011 and 2015.

Contractionary budget

“One wonders if this isn’t a time for a contractionary budget,” he added. Mr Gerlach’s comments come after Irish GDP growth for 2015 was revised up to 26 per cent this week by the
Central Statistics Office, driven by one-off factors such as the aircraft- leasing sector, restructuring by multinational companies and movement of patents.

Separately, Patrick Honohan, who stepped down as Central Bank governor last year, wrote on IrishEconomy.ie yesterday the “global assets and activities of a handful of large multinational corporations have now become so large as to make a mockery of conventional uses of Irish GDP”.

Mr Gerlach, now chief economist with BSI Bank in Switzerland, said: “While there are a lot of very serious politicians in Ireland, I am worried that people will look at the figures and ask why there is a need for any austerity. The tendency for fiscal populism in Ireland puts a lot of pressure on the established political parties.”

Some analysts believe the minority Fine Gael Government may not even get parliamentary backing for its current plan of easing taxes and raising public spending to the tune of €1 billion in the upcoming budget. Abandoning these plans in favour of a contractionary budget would be even more difficult.

Mr Gerlach said the 4.5 per cent growth in Irish consumption last year was a more reliable gauge of the underlying economy. “There is plainly a risk at some stage that people’s expectations would just take off, which would trigger unsustainable dynamics,” he said. “Fiscal policy should be counter-cyclical. It should be tightened in a boom.”

Meaningless

Prof Honohan said that ratios to GDP were “now meaningless for Ireland in most contexts”.

Within hours of the release of the revised data, Minister for Finance Michael Noonan said that Ireland’s debt-to- GDP ratio had fallen as a result to 79 per cent, compared to a previous estimate of 94 per cent. The ratio peaked at 123 per cent in 2013.

“International statistical conventions should be revisited to help the interpretation of the data in a world where huge [multinational corporations], legally controlled from small jurisdictions are moving assets around,” Prof Honohan said. “Failing international convention changes, it may be necessary to envisage a parallel set of accounts being also prepared for the Irish economy.”

The CSO said it would convene a “high-level cross-sector consultative group to examine how best to provide insight and understand of all aspects of the Irish economy”.